KLCC Property Stapled Group
(Nov 10, RM6.87)
Maintain “add” with increased target price (TP) from RM6.53 to RM7.50: KLCC Property Stapled Group (KLCCPSG) recorded a strong ninth month of 2014 (9MFY14) profit after tax and minority interest (patmi), an increase of 12% on a year-on-year (y-o-y) basis, while announcing a third interim dividend per share (DPS) of 8.19 sen, in line with our expectations.

Operating profit was backed by a steady portfolio of office assets, while retail mall and management services drove further growth.

KLCCPSG reported a 9MFY14 patmi of RM506 million, driven by robust management services profit (higher car park rates), up 6.8% y-o-y and expansion in retail mall profit contribution (tenancy renewals and new outlet contribution), up 6.3% y-o-y.

The 9MFY14 earnings before interest and tax (Ebit) growth was simultaneously backed by a stable office portfolio of assets (contributing 52% of 9MFY14 Ebit).

Quarter-on-quarter (q-o-q), net patmi was up 13.4% on the back of normalisation in interest expense.

A third interim DPS of 8.19 sen was announced (compared with 8.05 sen in the second quarter of 2014), with 9MFY14 totalling 24.9 sen, in line with our expectation. We keep our FY14 to FY16 forecasts unchanged.

Our long-term view on KLCCPSG has not changed — its stable portfolio of national and prime assets continue to provide stable recurring income (backed by triple-net-lease agreements) while the retail mall and hotel will capture upside on seasonality.

There are no changes to KLCCPSG’s medium- and long-term asset injection plans including asset enhancement initiatives at Kompleks Dayabumi, Lot D1 development and other right-of-first-refusal properties.

We reiterate our “add” rating on KLCCPSG and raise our dividend discount model (DDM)-derived TP from RM6.53 (8.3% cost of equity, 6% equity risk premium and 3% terminal growth rate) to RM7.50 by ascribing an additional 15% premium to our DDM-based fair value, given the potentially huge asset expansion or injection pipeline (while backed by a strong parent company).

Based on its current gearing level of 14%, KLCCPSG could gear up by a further RM5.8 billion (before reaching the limit of 50% of total assets).  — Affin Hwang, Nov 10

This article first appeared in The Edge Financial Daily, on November 11, 2014.